Can there be a No Risk Retirement?

How often does a retiree or retiree-to-be think about or ask this question: Can I have an adequate retirement income without taking risk? In almost every case, the answer will be “no.” A reader of Money Magazine recently wrote in with such a question.

I’m retired and don’t want to take chances. What’s the best way to draw income from my money?

The smart-ass answer would have been “stuff your money under your mattress.” The actual response was more thoughtful and properly noted that there are two different risks that a retiree faces when trying to maintain an adequate retirement income. The first is investing risk, e.g., the possibility that a market decline will severely damage your retirement nest egg.

The second retirement income risk is spending power decline or more specifically, inflation. In other words, even if your retirement money is 100% safe, your ability to pay all of your bills for life may not be.

Investing risk and spending power risk are related, of course. The standard approach to dealing with these risks is not to eliminate both of them completely. Rather, the “experts” suggest different ratios of stocks and bonds. They also suggest adjusting those ratios with age.

This conventional approach assumes that historical market returns and fluctuations are indicative of what we can expect in the future.

I’m not buying into that assumption anymore.

Towards the end of the article that responds to the “how do I obtain retirement income without risk” question, the writer starts thinking like me:

Finally, one thing you may not want to take a chance on is the possibility of falling below at least a minimum standard of living. Or to put it another way, you may want to take extra care that you’ll have at least enough income to meet your basic living needs the rest of your life.

That’s another way of talking about “liability-based investing.” The writer mentions Social Security, of course, and then an immediate annuity. The annuity may work but it will cost you a bunch extra to index the annuity payments to inflation. If you don’t, you have not eliminated the risk that you can maintain a minimum retirement living standard.

Thus, the writer could also have mentioned building a portfolio of bonds (I-Bonds) and/or TIPS to provide that baseline retirement income, with inflation protection.

The bottom line for me is that you should attempt to isolate part of your retirement income – the essential needs part – from investment risk and spending risk. Fooling around with a stocks/bonds ratio will not accomplish that.

Comments

At 53 I am learning quickly that there is NO such thing as a no risk retirement. At this point I may not have the Medicare/Medicaid parachute that my siblings have available to them because they are over 55. I take the risk that the government stop COLA payments for SS and government pensions. TIPs take the risk that the government will “calculate” inflations more like they do SS and less like the actual cost of living.